The Effect of Voluntary Spin‐off Announcements on Shareholder Wealth

Abstract

This paper presents estimates of the effect of a voluntary spin-off announcement on shareholder wealth. The results show that spin-off announcements have a positive influence on stock prices and that the relative increase in share price is greater for large spin-offs than for small ones. A SPIN-OFF OCCURS when a company distributes all of the common shares it owns in a controlled subsidiary to its existing shareholders, thereby creating a separate public company.1 This type of divestiture is in contrast to a sell-off, where the divested assets are purchased and become part of another firm. This paper examines the effect of a voluntary (as opposed to court-ordered) spin-off on the wealth level of shareholders. Several authors (e.g., Alexander et al. [1], Boudreaux [2], and Kummer [12]) have examined the effect of sell-offs on share values. Although Kudla and Mclnish [11] have published an empirical analysis of spin-offs, a sample size of six firms limits the generality of their conclusion that spin-offs increase shareholder wealth. Moreover, the authors use the day that the new shares are distributed as their event date. This paper remedies both of these shortcomings by examining the price behavior of 55 securities around the initial spin-off announcement day. We find that spin-off announcements enhance shareholder wealth and that these announcements usually follow a period of positive abnormal returns. These results are in contrast to the recent sell-off findings of Alexander et al. [1] who conclude that the announcement of a voluntary sell-off does not have a significance influence on the stock prices of divesting firms. Furthermore, they find negative abnormal returns over the 30-day period preceding the event. Section I of this paper considers some theoretical reasons for spin-offs and analyzes their valuation consequences. The research design and empirical findings are presented in Sections II and III, respectively. The paper ends with a summary and conclusions section. * Pennsylvania State University and Emory University, respectively. This paper has benefited greatly from the constructive criticisms of William Beranek, Joseph Sinkey, and participants of the Pennsylvania State Finance Workshop. We are also grateful to Stephen Brown for his assistance in the statistical methodology. ' Fitzhenry [8]. "Control" is defined as the ownership of stock possessing at least 80% of the total combined voting power of all classes of stock entitled to vote and at least 80% of the total number of shares of all other classes of stock of the corporation. The taxation consequences of a spin-off are identical to that of a stock dividend (i.e., it is a tax-free exchange).

Australian Divestiture Activity: An Examination of Gains to Sell-Off Announcements

“…However, support for the financial theories of divestiture gains is weakened by findings of no relationship between pre-divestiture financial distress and observed returns (Desai & Jain 1999;Miles & Rosenfeld 1983). Furthermore, if the financial motive is to use the proceeds to repay debt, in some situations this could be viewed as a weakening of the corporate governance function of debt and be discounted by the market accordingly (Williamson 1988).…”

Quién es quién en la investigación sobre Reestructuración de la Cartera de Negocios: La estructura intelectual

“…Hite and Owers (1983), Miles and Rosenfeld (1983), Schipper and Smith (1983), Alexander et al (1984), Rosenfeld (1984), Jain (1985), Klein (1986), Schipper and Smith (1986), Hite et al (1987), Boot (1992), Cusatis et al (1993), John and Ofek (1995), Lang et al (1995), Slovin et al (1995), Daley et al (1997), Krishnaswami and Subramaniam (1999), Mulherin and Boone (2000) Corporate governance…”

“…The following works are found on the topic of "restructuring methods": Hite and Owers (1983), Miles and Rosenfeld (1983), Schipper and Smith (1983), Cusatis et al (1993), Daley et al (1997), and Krishnaswami and Subramaniam (1999) on the subject on spin-offs; Schipper and Smith (1986) and Slovin et al (1995) on equity carveouts; Alexander et al (1984), Jain (1985), and Hite et al (1987) on sell-offs; Mulherin and Boone (2000) on acquisitions; Rosenfeld (1984), Klein (1986), Boot (1992), John and Ofek (1995), and Lang et al (1995) on divestitures.…”

“…964 Bethel and Liebeskind (1993) .961 Hitt et al (1996) .959 Lieberman and Montgomery (1988) .955 Johnson (1996) .954 Hoskisson and Johnson (1992) .954 Johnson et al (1993) . 953 Hill and Hoskisson (1987) .950 Montgomery et al (1984) .948 Duhaime and Grant (1984) .946 Gibbs (1993) .942 Shleifer and Vishny (1991) .938 Hoskisson and Turk (1990) .927 Bergh and Holbein (1997) .905 Palepu (1985) .887 Hoskisson and Hitt (1988) .885 Williamson (1985) .854 Porter (1987) .842 Ravenscraft (1987) .821 Williamson (1975) .734 Hite and Owers (1983) .965 Miles and Rosenfeld (1983) .965 Slovin et al (1995) .957 Schipper and Smith (1983) .957 Schipper and Smith (1986) .956 Alexander et al (1984) .951 Mulherin and Boone (2000) .940 Cusatis et al (1993) .935 Jain (1985) .923 Klein (1986) .906 Hite et al (1987) .890 Daley et al (1997) .883 Rosenfeld (1984) .878 Dimaggio and Powell (1983) -.855 Lang et al (1995) .850 Krishnaswami and Subramaniam (1999) .844 Myers and Majluf (1984) .820 John and Ofek (1995) .787 Porter (1985) -.766 Boot (1992) .749 Teece et al (1997) -.746 …”

Corporate Divestitures and Spinoffs in Singapore

“…In the early 1980s, the early wave of corporate restructuring prompted studies by Hite and Owers (1983) and Miles and Rosenfeld (1983) on spin-offs, Jain (1985) and Rosenfeld (1984) on sell-offs, and Schipper and Smith (1986) on equity carve-outs. Miles and Rosenfeld (1983) studied 55 spinoffs and found significantly large positive abnormal returns over the announcement period. Similar research by Hite and Owers (1983) also record significant increases in share prices around spin-off announcements.…”